This
last decade has certainly been a difficult one in which to be an investor.Because markets tend to repeat moves, I have been reviewing the period
1968-1982 looking for clues as to how the market might behave.History is interesting.We
tend to think that things are so very different today than they were in the
past.That may not be an accurate
assumption.

For
example, it is easy for us to think that market volatility is higher than ever,
with markets alternating between jubilation and despair; it seems like almost
every day there is a triple-digit swing in the Dow Jones.But if you think of volatility in terms of the difference
between the highs and lows of a given year, you will see that the past decade
parallels the market of 1968-1982.

Of
course, back then the Dow languished in the range of 750-1000, so a ten-point
move in the average was, percentage-wise, equivalent to a move of 100-plus
points today.Still, the annual
lows from 1968 to 1982 averaged 21% below the highs, while over the last ten
years that measure was 23%, a difference that can only be called marginal.

“Ah”,
some might say, “but look at the difference in volume”.And it is certainly a noteworthy difference:when I started in 1967 volume was typically 2 to 3 million
shares daily.I well remember the
first day that volume rose to over 5 million shares; it was a landmark, because
that was the share volume reached on the day of the 1929 crash, and it had not
been matched since.Now we measure
daily volume in the billions of shares.

So
there is no question that there are more participants, and vastly more money, in
the markets currently.But do the
markets behave differently today than they did in the past?I do not believe so, and my review of the 1968-82 period has served to
reinforce that belief.

There are people
who will argue that it is different today, and they would point to things like
hedge funds, high-frequency trading, dark pools, and private equity.I would answer that while the tools are admittedly much more
sophisticated, none of these things are really new.

The Gulf oil
spill, they may retort, is unprecedented.In
response I refer you to Chernobyl, Bhopal, Three-Mile Island.Industrial catastrophes, abhorrent as they may be, are nothing new.

Nine years ago
(see my website for the letter of July, 2001), I wrote in this forum that we
could possibly be facing an extended period that might mirror the years 1968 to
1982.I pointed out then that the market seemed to move in long
cycles alternating between generally rising prices for 15-20 years and then
running flat-to-down for another 15-20 years.

If you think about
it, you can easily rationalize such moves.Expansion is accompanied by rising stock prices; in turn followed by the
“digestion” of the expansion and flat or lower prices.Then the cycle repeats.(Witness:rising prices from 1942 to 1966; flat to lower from 1967 to 1982; rising
again from 1982 to 2000, flat to lower from 2000 to ?)

In each of the
flat-to-lower time frames stock investors spent a decade-and-a-half struggling
for annual returns that ranged a point or two to either side of zero.

Makes you rethink
dividends and bonds, doesn't it?

Speaking of bonds, they have their “long cycles”, too.It has been my belief for some five years now that the downtrend in
interest rates that began around 1982 will reverse course.If—or rather when—that happens we may well see bonds under the same
pressure that stocks are under today.We
know that there is precedent for rates to remain abnormally and artificially low
for decades longer than market forces would seem to warrant; think of Japan over
the last thirty years.So a
reversal may not be as imminent as I suspect.Still, we must guard against it, and we do that by keeping bond
maturities short.

Can we thus conclude that we are doomed to another 5 or 10 years of difficult
markets?The good news is that we
already have seen a decade of stagnation, so most of the misery may well be
behind us.The bad news is that we
probably will see a pretty flat market for at least a few more years.It is admittedly hard to foresee conditions that would change that course
in much less time.

The sun will come
up again, of course.After each
down cycle comes the up cycle; that is normal and it’s just a matter of time.So we do have the next bull market to look forward to, whenever it may
finally arise.In the interim we must do
our best to protect what we have.